The Golden Passport

by Duff McDonald

  Of course, the money eventually became obscene, while the intellectual challenges were drained from the jobs as the forces of commoditization did as they always do, which is to eat their way up the value chain. Whereas an investment bank in the 1950s may have been so crucial to an initial public offering as to be worth their 5 percent fee, by the 1990s, the process had become so institutionalized that they weren’t worth a fraction of that amount. The thing is, by the 1990s, the financial sector had become the tail wagging the economy’s dog, and its grip on the economy’s money flows was—and remains—too tight to dislodge. That huge sums of those monies flowed right back into HBS’s coffers explains how the likes of Dean John McArthur were inclined to shrug off the distortion of the economy as if it were all just a lark.

  Just as Harvard Business School started by cloaking a school of private business in the idealism of public service, the majority of MBAs who continue flooding to Wall Street insist on cloaking a desire for obscene compensation in intellectual terms that no longer apply. But not all of them. Some HBS grads do go to Wall Street and end up building or running real businesses. Those are the operators, and they include people like the founders of Donaldson, Lufkin & Jenrette, Blackstone founder Stephen Schwarzman, Goldman Sachs CEO Hank Paulson, and JPMorgan Chase CEO Jamie Dimon. But the rest of them are nothing more than optimizers, that part of the machine that seeks to iron out (and profit from) the inflection points of financial value. Some become famous in their own right—consider the likes of hedge fund managers such as Seth Klarman, Ray Dalio, John Paulson, and Bill Ackman (’92)—but none of them are adding much value to anything but their own bank accounts.

  The story of HBS on Wall Street starts on a high note, when three plucky HBS grads decided to take on the establishment and ended up building an institution. It ends with the smugness of Bill Ackman of Pershing Square Capital Management, who has somehow convinced himself of the moral righteousness of forcing a short-term orientation on the CEOs of America, and Ray Dalio, the founder of Bridgewater Associates, who has managed to confuse the ability to make money with greater self-awareness and has compiled the more than 200 principles by which he lives for the edification of those who might have the good fortune of working for him. Both of those men are rich, which means they both know how to make money. But they both desperately want it to mean something else. There’s a middle part of the story, too, when HBS grads played a part in nearly destroying the entire global economy. But that deserves its own discussion in this book. For that, see chapter 59.

  Taking a job on Wall Street in the 1950s wasn’t exactly a risky move. With Harry Truman and his trust busters out of office and the pro-growth Dwight Eisenhower in, Wall Street was enjoying a growth spurt along with the rest of the economy—the number of investment bankers doubled between 1950 and 1960.1 Stockbrokers had risen in status, too. By the late 1950s, they rivaled CEOs, judges, and doctors in terms of public regard.2 In 1952, only 4 percent of Americans owned stocks. Ten years later, more than 10 percent did.3

  But founding a Wall Street firm was another thing entirely. Despite the growth, the Street was still a club of powerful “white-shoe” firms, the entrance to which had more to do with your connections than it did with anything else. And if they scrapped it out among themselves for business, they protected their oligopoly just as fiercely—no new firm of note had been founded on the Street since 1932. The only scenario in which it would make sense to even consider starting a new firm was if you combined two seemingly incompatible things—a pedigree that impressed people with a desire to go after business that didn’t. Just two years out of business school, Richard Jenrette (’57), Dan Lufkin (’57), and William H. Donaldson (’58) decided to do just that. They founded a Wall Street startup, Donaldson, Lufkin & Jenrette (DLJ), dedicated to helping small companies get access to the capital they needed to grow.

  A southerner who was set to follow his father’s footsteps into the insurance business before he was drafted during the Korean War, heading to business school after that, Dick Jenrette didn’t bring a whole lot of social pedigree to the partnership, despite having landed a job at Brown Brothers Harriman out of HBS, where he handled, among other things, Greta Garbo’s account.4 But Lufkin and Donaldson more than made up for that lack. Yale graduates both, they were also members of the secret society Skull & Bones, and Donaldson had even put in time working for George Herbert Walker, the uncle of future president George H. W. Bush.

  “I’d already had a chance to observe a lot of people before I got to HBS, but I still thought Lufkin and Donaldson were two of the best all-around guys that I’d ever met,” recalls Jenrette. “They also knew everybody in New York, whereas I didn’t know a soul. I thought they were so sharp, I wanted to be part of their gang.”

  The founders’ vision: There was money to be made in providing in-depth, quality research—thirty- to forty-page reports, similar to HBS case studies—on emerging growth companies. They were right about that, and carved out a lucrative niche over the years, despite one banker at Lehman Brothers promising Lufkin, “We’re going to squash you like a fly on a wall.”5 Over the next three decades, the firm grew into a major player on Wall Street, expanding into all manner of adjacent businesses along the way, from asset management to brokerage, underwriting, trading, and venture capital.

  That these three HBS graduates carved out legends on Wall Street is no secret. What’s less known is just how much they relied on their alma mater—from the education it gave them to using it as a source of fresh talent—on the way to getting that done. Whereas it really is a stretch for HBS to take credit for the careers of many who passed through it, in the case of DLJ, it’s 100 percent true. It wouldn’t have happened were it not for HBS. “We recruited at HBS from day one,” says Jenrette. “We figured it was better to get people who were kindred spirits, and were already trained, so we didn’t have to set up an elaborate training program like those banks that hired straight out of undergrad. Ten of the first 12 people we hired were Baker Scholars from HBS. Amazingly, by the mid-1960s, more people were signing up with us than with Chase, Ford, Merrill Lynch, or Morgan Stanley. MBAs were pretty cheap at the time, too. We were probably the first Wall Street firm to discover just how profitable it was to hire MBAs, but Goldman Sachs caught on pretty fast.”

  John Castle, CEO of DLJ from 1979 to 1986, was an HBS grad. His successor, John Chalsty, CEO from 1986 to 1996, was too. John Carter, the president and CEO of Equitable who bought DLJ? HBS. The list is endless: Richard Pechter, chairman of DLJ Financial Services; Robert Cavanagh, onetime head of DLJ Capital Partners; Joe Roby, president and COO. Those who joined DLJ then went on to even greater heights include Hamilton James, president of the Blackstone Group; Susan Decker, erstwhile president of Yahoo!; and Gideon Yu, former CFO of both Facebook and YouTube, a partner at both Sequoia and Khosla Ventures, and currently a co-owner of the San Francisco 49ers.

  Donaldson and Lufkin left the firm in the early 1970s in search of new adventures. Donaldson was Nixon’s undersecretary of state, helped found the Yale School of Management and served as its first dean, was chairman and CEO of the New York Stock Exchange, chairman and CEO of Aetna, and the twenty-seventh chairman of the SEC. Lufkin took a more wide-ranging approach, from his role as a cofounder of Earth Day in 1970 to ranching and late-career stint in leveraged buyouts. Jenrette stayed on, and was chairman and CEO when the firm sold itself to Equitable for $432 million in 1984. In a classic feat of the Trojan Horse variety, Jenrette was named chairman and CEO of Equitable in 1990, a position he held until 1996.

  Ask Jenrette about what Wall Street has become, and he points a finger at some HBS grads, but saves his choicest criticism for others. “I guess you could say that takeover artists like Bill Ackman have contributed to the short-term orientation of shareholder value,” he says. “Now you have to beware of having too much cash on hand or not enough leverage. CEOs have been pushed into becoming very short-term oriented.” But he thinks that the real turning point ca
me when Wall Street was deregulated in the 1990s. “If you’re looking to pass blame around, you have to look at what happened under Bill Clinton, Larry Summers, Bob Rubin, and Sandy Weill,” he says. “None of those guys went to HBS. I had been in the forefront, along with Goldman’s John Whitehead, of keeping banks out of the business. We knew that if they got into it, all sorts of speculative things would start happening. It used to be that the only people selling derivatives were schlocky little put-and-call brokers. When you wanted to go short, you used to have to call a trader, borrow the shares, sell them, et cetera. They didn’t have these products that in one fell swoop you could short the world. When banks got into it, it made speculative investments respectable. It made momentum investing acceptable. And that spilled over to CEOs themselves. Suddenly they all wanted to do new ventures, go public, take over a company and load it up with debt. I don’t think you can blame that on HBS, or even MBAs in general.”

  Jenrette, who now restores old houses, walks into a little bit of HBS history every time he’s at home in New York—he lives in George Baker’s old house. In 1984, HBS honored Jenrette with its Alumni Achievement Award. In 2006, it gave one to Donaldson as well. Dan Lufkin? He has apparently not yet met his “obligation” to the School.

  Stephen Schwarzman is typical of Wall Street success stories in that he’s fairly sure most of it has come through his own hard work, good timing, and personal brilliance. But he is also typical of HBS graduates in that he is more than happy to credit HBS with playing some part in that success. Schwarzman’s Blackstone Group, which he cofounded as a mergers and acquisitions boutique in 1985, has grown to become a sprawling global private equity, investment banking, and alternative investments firm with some $336 billion in assets under management and $2.2 billion in net income in 2015.

  Asked about his time at the School, Schwarzman points to the School’s teaching methods—in sections and via the case method—as giving him an important edge in his career. But he also thinks HBS was successful at giving students an understanding of the interrelatedness not just of the functions within a particular company, but of systems in general. “HBS teaches you something simple,” he says, “which is that everything in a system relates to everything else. . . . Every element of a company needs to be closely coordinated with the others. No one ever said that out loud, but it only took about two months for me to figure out that underlying every case was the exact same message. And that simple lesson is remarkably valuable. . . . It helps you to much more easily predict cycles and reactions and counteractions in large complicated systems.”

  But he is also quick to acknowledge the limitations of the degree, in particular the fact that it doesn’t turn you into a different person but simply allows you to hone those skills that are helpful in an institutional setting. “Getting an MBA doesn’t turn you into Steve Jobs or Bill Gates,” he says. “I am reluctant to say this, but God creates those people. I don’t mean that in the religious sense, just that they are completely unique intellects. People who are going to give us highly unusual ‘alphabet-inventing’ kinds of changes don’t need MBAs. Some of them barely keep touch with reality, like Steve Jobs. What the MBA does is takes smart people and makes them more effective, more knowledgeable, and more sensitive to what can go right, wrong, and how. And to intervene into systems. On balance, it’s a very good thing, and it encourages a lot of good cooperative behavior in institutional settings. But if an MBA isn’t so smart or has objectionable interpersonal characteristics—if they’re arrogant, disruptive, or self-congratulatory—that will defeat them and their education. Usually, if people are talking about what’s wrong with someone, the MBA is an accoutrement, not the main event.”

  For those who would judge a school by the careers of its graduates, Jamie Dimon presents a challenging contradiction. On the one hand, he is widely regarded as the best banker of his generation. A key lieutenant to Sandy Weill in the creation of Citigroup during the deregulation of the 1980s and 1990s, Dimon was eventually fired by his mentor, spent a few years in the corporate wilderness, and then reemerged as CEO of Bank One in 2000. When Bank One merged with JPMorgan Chase in 2004, and Dimon ascended to the role of CEO in 2005 and chairman in 2006, he had effectively scaled the highest peaks of U.S. banking not once, but twice. In 2015, the company had revenues and net income of $96.6 billion and $24.4 billion, respectively.

  Dimon’s management of JPMorgan Chase in the lead-up to the financial crisis left it in the unique position of being the one bank that the government actually called on for help as the crisis began to unfold, the result of which was that the bank bought the failing Wall Street firm Bear Stearns over the course of a single weekend in March 2008. That was followed by the purchase of the teetering Seattle bank, Washington Mutual. In the years since, the firm has only solidified its position at the top of the industry, a fact reflected quite clearly in Dimon’s bank account: In 2015, he earned a reported $27 million.6

  For a brief moment in time, it seemed the man could do no wrong, a sentiment expressed quite clearly in 2009’s Last Man Standing: The Ascent of Jamie Dimon and JPMorgan Chase, written by the author of this book. But the moment didn’t last. In 2012, the firm revealed that a single trader in its London office—Bruno Iksil, nicknamed “the London Whale”—had incurred a trading loss of $2 billion, and the loss continued to grow thereafter, eventually reaching more than $6 billion.

  Dimon, who initially referred to reports about the loss as “a complete tempest in a teapot,” was pilloried in the media not just for the company’s failed internal risk controls, but for the mere fact that such a loss was even possible at a time when the American people were both reeling from the 2008–10 recession and angry that the country’s financial establishment had not only just avoided being punished for its crimes, but was indeed back to business as usual. The fact that he had been the loudest advocate for the industry when his currency was at a high only added to the vitriol. “You have to admire the fellow’s ambitions,” wrote Vanity Fair’s editor, Graydon Carter. “Making the rounds trying to drum up sympathy for a group of people whose unregulated betting parlors drove governments and businesses into the ground, along the way leaving untold millions without work around the world . . . is no easy task.”

  Then again, neither is running one of the world’s largest banks. And Dimon gives HBS at least some credit in preparing him for doing so. “It wasn’t what we learned, but how we learned—through the case method. And you learned as a group, not as individuals, with the result that you had a much broader understanding than you could ever arrive at on your own, no matter how smart you are. By the time you’re done with any case, you have a well-rounded view of everything involved. I think it’s a far better education than a lecture, because you also learn how to think, how to argue your point, and how to defend it. So the case method makes you a better thinker. But you also can’t ignore two of the most important variables in success, which are timing and luck.”

  That’s how you think. But when it comes to what you think, Dimon doesn’t think HBS has much of an effect. “The most important thing that HBS teaches you is how to think, how to manage, and how to get things done,” he says. “They make you better at those things than you otherwise might have been, but I really don’t think they change your ideology. Today, the School is obviously more interested in corporate social responsibility, as they should be. But it’s not like they turn you into something that you weren’t before you got there. It certainly doesn’t make a student’s desire to be rich any more potent than it was. That’s why some of them went there in the first place.”

  HBS still loves Jamie Dimon, and the feeling is mutual. One of his three daughters attended the School. But he also serves as an illustration of the two-way street of benefit that lies between HBS and its most successful graduates. In short, while he doesn’t hesitate to credit the School with playing a decisive role in his education, the balance tilted a long time ago away from Jamie Dimon and back toward HBS. At this point
in his career, HBS is but a memory, albeit a good one. But for HBS, the payoff is now.

  For many years, Goldman Sachs sent a dozen, if not more, members of its graduating analyst class to HBS for further refinement before rehiring them as associates. As with the rest of Wall Street, that practice is less prevalent today, but the firm considered HBS-educated bankers such an important part of its branding that at one point in the 1990s, when it felt that not enough of its people were getting accepted, it threatened to stop recruiting there. The problem was soon remedied.

  It’s interesting to contrast the careers of two men who attended HBS and then spent the bulk of their career at the investment bank. One ended up one of the most respected Wall Street executives in history. The other put together a stellar tenure at Goldman, only to squander his reputation in a remarkable display of selfishness, cronyism, and tone deafness. The first, you might say, delivered on HBS’s promise to educate leaders who make a difference in the world. The second did nothing of the sort.

  John C. Whitehead (’47) spent his childhood in Montclair, New Jersey. After graduating with a degree in economics from Haverford College, he enlisted in the U.S. Navy, which sent him to HBS to study naval accounting so that he could work as a disbursing officer on a ship. He ended up being captain of a landing craft that ferried troops to Omaha Beach during the Normandy invasion. After the war, he returned to HBS to teach naval accounting and enrolled as a student, prompting him to joke that he was the first person ever to go from being a member of the faculty to being a student.7